Narrative: US Tech Avoids Taxes
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Narrative: US Tech Avoids Taxes (Jan 28, 2017)
Written: January 28, 2017
US tech companies have for years maintained elaborate tax structures in Europe and other regions around the world, intended to ensure that they pay the lowest possible amount of tax overseas and repatriate as many profits as possible to the US, where they can apply more favorable tax rates. This has meant the creation of shell companies and other structures designed to domicile European operations in low-tax countries or in other cases to ensure that European operations are merely funnels for sending most of the money back to the US.
This has been a subject of frequent articles in the European press for years now, with outrage over the very small amounts big companies like Apple, Amazon, and Google pay in Europe. But no European government ever took meaningful action on this point until the EU began investigating Apple in 2014, and eventually released its findings in 2016. That particular case is being appealed and we don’t yet know the final outcome, but it’s quite possible that we’ll see similar cases against other big US tech companies in time if the EU ultimately prevails.
The broader context here is the fact that some of these companies are keeping large hoards of cash offshore while awaiting a potential future tax holiday on repatriated earnings, and so they are not paying taxes either in the US or overseas in the short to medium term. Since that cash is essentially sitting around in overseas jurisdictions, it makes an easy target for authorities there looking to claim their fair share. But this also plays into broader battles over tax authority and protectionism, with smaller European tech companies often complaining about the relative power of big US tech firms that compete with them. Neither of those longer-term conflicts is likely to go away.
EU Takes Action Against Amazon and Ireland Over Taxes (Oct 4, 2017)
It was reported earlier in the week that the EU would soon take action against both Amazon and Ireland (with regard to Apple) over the underpayment of taxes in the trading block, and both actions are now official. In the Amazon case, the company is being asked to pay 250 million euros to get the company up to the level of taxes the EU says it should have paid in Luxembourg over the last few years, while in the case of Ireland, the country is being taken to EU court by the European Commission over the fact that it has not yet collected and placed in escrow the 13 billion euros Apple owes it. I’ve covered both cases in the past, so I won’t add much here, but of course this is all part of the ongoing tension between the EU and the US tech industry on a variety of fronts, something that prompted me to create the first new narrative here on the site in a while and retroactively tag a number of past posts against it – you can see it here.
Google Settles With Italy for $320m Over Unpaid Taxes (May 4, 2017)
Apple files 14-point appeal against European Commission’s $14 billion tax edict – AppleInsider (Feb 21, 2017)
Long story short: Apple has filed its formal appeal of the EU’s action against Ireland regarding Apple’s tax treatment in the country, and it argues for the dismissal of all charges on the basis of a number of different points. That’s not surprising – Apple immediately after the ruling said it would appeal, so this is just that process rolling along. I’ve never been a huge fan of the ruling – it felt like judicial overreach and part of the ongoing spat between the EU and US on taxes and on competition between US and European tech companies rather than something based on actual legal merit. Nevertheless, as I admitted at the time, neither I nor the vast majority of other tech industry commentators are actually experts in EU tax law, and even admitted experts like the Irish authorities, Apple’s accountants and lawyers, and the European Commission’s investigators can actually agree on what the right answer is. We can state opinions all we want, but they don’t actually matter – this case will go to court and at some point a conclusion will be reached which all the parties will have to live with. A move to enable lower-tax repatriation in the US would certainly go some way to bolstering Apple’s case that it already pays adequate taxes in its home market on what it earns in Europe, but Apple has no direct control over that outcome either.
Apple CFO says capital returns will rise if cash repatriation rate is lowered – Financial Times (Feb 14, 2017)
Apple CFO Luca Maestri spoke at the Goldman Sachs conference today, and although the audio quality of the broadcast was miserable, the FT seems to have been able to pick out the best bits. Two specific ones are detailed here – firstly, Apple still hopes to be able to repatriate more cash soon following a change in US tax policy, and secondly, it remains skeptical about more manufacturing in the US. On the former point, it sounds like Apple’s main focus for the repatriated cash would be increasing returns to shareholders and not big acquisitions – that’s not altogether surprising because it’s in keeping with past strategy, but there has been a rising chorus of voices saying that the returns to shareholders don’t seem to be having the desired effect on the share price. The US manufacturing comments also aren’t surprising – everything we’ve heard on this point as it regards Apple specifically has come from others – Donald Trump, Foxconn, and so on – not Apple itself. And certainly manufacturing any kind of high scale product like iPhones in the US would be almost impossible given the lack of appropriate infrastructure here.
via Financial Times
Interesting to see this move go ahead in the wake of the recent EU Ireland tax action. Ireland is obviously a big base for Apple in Europe, and this is mostly about moving the legal home of the iTunes business in Europe, rather than a big physical move. But it’s intriguing to see Apple double down on its presence – legal and physical – in Ireland with all the uncertainty over its tax status there. Apple is, of course, fighting the EU’s ruling with the help of the Irish government, but there’s obviously still a decent chance that things don’t go Apple’s way here.
Apple seeks tax benefits, label law waivers to build iPhones in India & boost local sales – AppleInsider (Dec 29, 2016)
India is a market Tim Cook talks about a lot, as if it had the potential of China over the long term, and yet Apple’s presence there is minuscule for a host of reasons, not least much lower disposable incomes and regulatory barriers to a retail presence. However, Apple continues to chip away at these challenges bit by bit in an attempt to grow its business in India. I suspect we’ll still see slow progress there over the short to medium term.
Alphabet and Amazon continue to be the highest-profile examples of US companies seeking to minimize their overseas tax burdens, and of course the EU has already taken action against Apple in this regard. A US tax holiday in 2017 could start to change this narrative, but until then it’s likely to continue to draw unwanted attention.
An investigation which began in 2014 concluded in August 2016 with the EU finding that Apple’s tax arrangement with the Irish government contravened EU tax policy, and requiring that Ireland recoup $14.5 billion in back taxes. The EU had also made similar moves with regard to Starbucks and Fiat as a result of similar investigations, but the numbers involved in the Apple case are far larger. Apple argues that it creates essentially all the value in its products in the US – iPhones and other products are famously “Designed by Apple in California” – and that therefore it repatriates all its profits to the US to be taxed there. The Irish arrangement recognized this argument and the Irish government has been happy to have Apple build a big base in Ireland on this basis, but the EU feels that Ireland’s treatment of Apple is an example of unequal treatment. Part of the reason for all this is that Apple has been keeping huge amounts of cash overseas for years in anticipation of an eventual tax holiday in the US, and so this isn’t just about Apple and the EU but also about a larger battle between US and European tax authorities.
via New York Times